“Sometimes I make mistakes in evaluating the future economics of a business I bought for Berkshire – every capital allocation case goes wrong. Here are two judgments about the stock that can be sold – we think these are part of the ownership of the business – and 100% of the company acquisition,” he wrote in a letter to shareholders on February 22.
In this article, Mint Over the past year, Buffett has made two major portfolio moves at Berkshire: adding cash piles and investing in Japanese stocks. Along the way, we included insights from Rajeev Thakkar, chief investment officer of Parag Parikh Mutual Fund, who has been studying Buffett’s investment strategy for years.
Why does Buffett have to hold record cash?
Berkshire’s portfolio can be broadly divided into three buckets:
– The first bucket has 189 subsidiaries, and they have full control. Since prices are not cited in the exchange, it is difficult to value these companies exactly.
– The second barrel of securities that can be sold, in other words, is the stock of a large company. Berkshire does not control these companies, but rather treats them as part of ownership through stocks. This bucket attracted the most attention.
– The third basket is cash, which also includes short-term fiscal bills. Since Berkshire operates a large insurance business, it will always maintain a portion of its portfolio in cash for service claims.
Berkshire has $325 billion in cash and cash equivalents, up to $167 billion in December 2023. In context, this is the highest cash pile that Berkshire maintains. As a percentage of assets, cash and equivalent are also at all-time highs.
This happened mainly because Berkshire prunes its holdings in listed stocks. Now, the value of listed stocks has dropped from $354 last year to $272 billion now.
Buffett said that while their holdings of sellable stocks have declined recently, the value of the company in the first company has increased and far exceeds the value of a sellable portfolio. He said Berkshire always prefers equity over cash, but it is fair whether it is in the first or second barrel.
“Berkshire said they will provide a lot of cash for their insurance business. But even outside of that, the cash has increased and they are selling some U.S. stocks. So, in my opinion, it shows that they are not comfortable with the overall valuation level,” said Thakkar of PPFAS MF.
Thakkar added: “Given that the stock price has risen sharply, it’s hard to come up with new ideas for them, and I think that will illustrate the rise in cash and some of the sales they’ve made in the stock.”
Interestingly, although Berkshire has been stake in U.S. companies, including Apple, Buffett told investors that it will increase its holdings in Japanese stocks over time.
Please read also: Mint Quick Edit | Is Warren Buffett’s investment inactivity justified?
What makes Japanese stocks unique?
Buffett follows an interesting Japanese investment strategy. Berkshire issued yen-timed bonds and invested earnings in Japanese stocks. Bloomberg reported that Berkshire issued bonds worth 281.8 billion yen ($1.89 billion) in October 2024, making it the largest foreign bond issuer of the year.
Buffett began buying Japanese stocks in 2019. His combined holdings of the five shares at Mitsubishi, Itochu Corporation, Mitsui & Co, Sumitomo Corp and Marubeni Corp. are worth $23.5 billion. Berkshire acquired the shares for $13.8 billion.
It is worth noting that the dividend income of these stocks far exceeds the interest cost of their yen timed bonds. They received a dividend of $812 million in 2024 and paid $135 million in interest expenses on the yen-timed bonds.
“It’s a very obvious deal. He tried to praise the management and said they were the kind of Berkshire, but in the letter, he mentioned that the dividend exceeded the interest cost in the yen borrowing. So, basically, it’s a clear arbitrage,” Thakkar said.
“Stock trading is cheap, and the dividends are far more than the borrowing costs Berkshire owns in Japan. So he not only has a positive difference in investment in Japanese stocks because his dividend income exceeds the borrowing costs, but the value of the stock has also increased.”
There is no currency risk, either, because borrowing is in the yen and the yen is invested. Interest and dividends are also in the same currency.
When Berkshire first started buying Japanese stocks in 2019, he agreed to put its stake in less than 10%. But as they approached the cap, he said the two companies have agreed to moderately relax Berkshire restrictions.
“As time goes by, you may see an increase in ownership of all five people at Berkshire.”
Should you buy Berkshire Hathaway shares?
Thakkar of PPFAS said Berkshire’s current structure is not very attractive to investors with a small number of investments. Regarding PPFAS’s mutual fund portfolio, Thakkar said he could buy stocks directly.
“Current Berkshire is a mix of rail and utilities and this kind of business. So these are usually very safe businesses, but usually bring lower returns to capital businesses. These are not the kind of high returns that we’ve seen before, like candy or moody investments.”
He said that for very large funds such as university endowments or sovereign funds, investments in Berkshire may make sense. For smaller players, unless the price drops sharply, people can look for ideas elsewhere.
Berkshire has two types of shares, with A and B stocks having more voting rights than B stocks. They recently traded for $718,750 and $478. Residents can invest in foreign stocks through RBI’s Free Remittance Plan (LRS) limit of $250,000 per year.
Berkshire’s annual growth rate (CAGR) was 19.9% from 1964 to 2024, while the S&P 500’s distribution was 10.4%, including dividends.
